The Problem of Diffuse Costs and Concentrated Benefits

Oct 16, 2019 | Blog | 0 comments

Do you ever find yourself observing a seemingly illogical government program, spending decision, or other strange practice and ask “how is it that no one has fixed that?” If you are like me, you encounter this phenomenon regularly. This often takes the form of a curious headline (Save Federal Funding for the Cowboy Poets!) that most people see and can’t believe is real. I would like to suggest that this phenomenon often results from the problem of diffuse costs and concentrated benefits.

To understand this concept, consider a hypothetical law that assessed a $1 tax on everyone in the United States with the proceeds to be given to one individual for unrestricted use as he sees fit. The people harmed by such a law—the individual taxpayers—will not be very motivated to spend the time and effort to convince Congress to change the law. They might resent the dollar taken from them for a silly cause they don’t support, but the lost dollar isn’t worth the trouble of doing something about it.

On the other hand, it’s hard to imagine something that would motivate the recipient more than the prospect of receiving an easy $350 million. He would fight hard to keep such a law in place, hiring lobbyists, running public information campaigns about all the wonderful things he would do with the money, and donating to the campaigns of elected officials. In fact, he would probably be willing to spend upwards of $349 million on such an effort.

Often, the benefits of a given policy are concentrated in a relatively small number of people or interests (in my hypothetical, an army of one), yet the costs are spread out (diffuse) to a great many. The impetus for individual action to maintain or change the policy is very real for the beneficiaries, and virtually nonexistent for the payers.

While this phenomenon is perhaps most easily identified in our tax policy, it is repeated throughout our public policy debates. Why is it so difficult to close a military base? Why do restrictive occupational licensing regimes persist? Why does overall government spending regularly increase? Why do silly or bloated programs just get more bloated? In each case, the many paying for or harmed by the policy are harmed only a little bit by each program, whereas the few who benefit profit greatly.

Perhaps nowhere is this problem more prevalent than in the practice of levying taxes in order to pay for corporate subsidies. Consider the extraordinary cost of Oklahoma’s wind energy subsidies, and perhaps more revealing, the herculean effort to protect those subsidies. But, as a payor of that program, could you pinpoint exactly how much your contribution to the wind subsidy was and when it started? Did you even notice it? Probably not.

So what is the solution? Frankly, no easy fix exists. By its very nature, this problem is extraordinarily difficult to address. But it would be a good start for our policymakers to at least be aware of the problem. Legislators, when faced with legislation or budgeting decisions, ought to constantly ask themselves, “Who benefits from this?” “Who pays the costs?” Lobbyists often have extensive knowledge of particular policy matters and can marshal persuasive arguments on behalf of their clients’ interests. There is nothing wrong with using them as a resource in evaluating legislation. But legislators should keep in mind that lobbyists represent paying clients, not the public at large.

On the benefit side of the equation, we should view any government expenditure that does not confer a near universal benefit on the public with extreme skepticism. As for cost, legislators owe it to taxpayers, who cannot be at every committee hearing, office meeting, or floor debate–much less watch how every tax dime is spent–to view every government expenditure as if it were coming right out of legislators’ own pockets. Such a perspective has a way of concentrating the mind in a manner never achieved when costs are viewed as just a little bit at a time spread out across millions of people. It may be trite to point out that individuals are more judicious with their own money than when spending other people’s money, but that makes it no less true.

Ben Lepak is Legal Fellow for 1889 Institute